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Splitsville for Agilent
SANTA CLARA, Calif.—So, a little less than six months ago, ISI Group analyst Ross Muken was apparently staring at just the right spot in his crystal ball when he said he thought Agilent Technologies should consider divesting some of its underperforming assets—specifically saying that it should explore a split of its electronic measurement business and life-science business.
Now, mid-September brings news from Agilent that it will separate into two publicly traded companies: one in life sciences, diagnostics and applied markets (LDA) that will retain the Agilent name, with total 2013 revenues of some $3.9 billion, and the other that will consist of Agilent's current portfolio of electronic measurement (EM) products, which boasts $2.9 million in estimated 2013 revenues and will receive a new moniker later. The separation is expected to occur through a tax-free pro rata spinoff of the EM company to Agilent shareholders.
"Agilent has evolved into two distinct investment and business opportunities, and we are creating two separate and strategically focused enterprises to allow each to maximize its growth and success," said William Sullivan, Agilent's president and CEO. "Agilent's history is one of reinvention, starting with our own separation from HP and including four major spinoffs since 2005. We are once again making a bold move, as we have done many times in the past, to ensure a future of sustainable growth for both the LDA and EM companies."
The benefits for Agilent begin with the belief that the separation will result in greater management focus on the distinct businesses of LDA and EM, with the ability for the LDA company to devote resources to the higher-growth LDA business and reduce exposure to the more cyclical EM industry. In a similar vein, the EM company will be able to devote resources to its own growth that were previously used to capitalize LDA.
Agilent cited having "two independent and unique investment profiles" as another benefit, along with the observation that both companies "will be well capitalized, having strong balance sheets and investment-grade profiles with target debt-to-EBITDA ratios below 2.0x."
The Agilent board of directors granted initial approval to pursue the separation plan at its meeting on Sept. 18. Under the plan, Agilent shareholders will receive a pro rata distribution of shares in the new EM company via a tax-free spinoff. Although Agilent admits it cannot guarantee the separation will be completed within a certain time frame, the transaction is expected to be completed by the end of calendar year 2014, subject to the satisfaction of closing conditions. The key such conditions would be obtaining final approval from the Agilent board of directors, satisfactory completion of financing, receipt of tax opinions, receipt of favorable rulings from the Internal Revenue Service, the effectiveness of a Form 10 filing with the Securities and Exchange Commission and satisfying foreign regulatory requirements.
Bill Sullivan remains president and CEO of Agilent and Didier Hirsch continues as chief financial officer (CFO). Ron Nersesian, who has been Agilent's president and chief operating officer, is executive vice president of Agilent and president and CEO-designate of the new EM company, effective immediately. Neil Dougherty, who has been Agilent's vice president and treasurer, is vice president of Agilent and CFO- designate of the new EM company.
"The board and I believe Ron is the right leader for the new company," said Sullivan. "He has an excellent track record of running this business, and he has the vision and expertise to position the new company for accelerated growth and success."
Right on the heels of the announced split of the company, Agilent also noted that it has combined its Life Sciences Group with its Diagnostics and Genomics business and named Lars Holmkvist the new group's president and senior vice president of Agilent, effective immediately. Holmkvist was previously president of the Diagnostics and Genomics Group and senior vice president of Agilent.
Agilent, the life sciences, diagnostics and applied markets half of the splitting company, will consist of two businesses: the Chemical Analysis Group, led by Mike McMullen, current group president and Agilent senior vice president, and the new Life Sciences and Diagnostics Group, with Holmkvist as its president. Nick Roelofs, who has been president of the Life Sciences Group, will leave Agilent to pursue other business opportunities.
"We are creating a new Agilent with a simplified structure that can move quickly to develop and deliver industry-leading total workflow solutions for our customers," said Sullivan. "Lars is the ideal leader for the new group with his years of experience, depth of market knowledge and superb leadership style."
On the news of the Agilent splitting plan, Baird raised its price target on Agilent from $52 to $55, with the firm expressing its belief that such a move will mean cleaner investments and different growth profiles that will be more focused and on which value can be determined more easily.
Jefferies & Co. analyst Brandon Couillard noted that Agilent's decision to spin off its EM business "reflects a welcome departure from its status quo position and acknowledgement that the cyclicality of its electronics unit has impaired a more rationale appraisal of its inherent value amongst healthcare investors."
ISI analyst Muken, who had been one of the early people rooting for a split, wrote in a research note about the Sept. 19 news that, "By splitting the business, we believe Agilent will achieve significant multiple expansion as investors can more effectively analyze growth drivers, identify the correct comparables, and properly value the business units." Analysts at ISI and Janney Montgomery Scott were both quick to upgrade Agilent's stock on the news. To be honest, Wall Street in general seemed happy about the whole affair, as Agilent's stock hit its highest point in more than two years.
As some market-watchers have pointed out, splitting the business won't be an entirely clean affair, as the roughly 250-person R&D department serves both sides of Agilent's business and may not be easy to divvy up. During a conference call with analysts, Sullivan did say, "We are dividing the corporate labs to correspond to the two businesses, driving technologies into revenue more quickly."